Abstract

Following a series of debt cancellations, the public debt of many developing countries has reached low levels. These countries are being urged to extent public spending to reach The Millennium Development Goals (MDGs), but can not exclusively rely on external financing. Consequently, is an increase in the domestic debt possible and desirable? This paper investigates this issue in the case of the West African Economic and Monetary Union (WAEMU), of which several countries have benefited from important debt cancellations. We show that an increase in the domestic debt is not only possible, since there exists excess bank liquidity and that institutional constraints may be overcome, but also desirable since the main risks linked to the rise of public debt (debt distress, crowding out of private investment and real exchange rate appreciation) seem weak at the moment.

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